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The Homer City plant in Pennsylvania is a poster child for the woes that coal faces.

At 1,884 MW, it is one of the largest coal-fired plants in Pennsylvania, and it has access to two markets. It can sell electric power into the PJM Interconnection and into the New York ISO.

The plant is also emerging from Chapter 11 bankruptcy court protection or, as one analyst said in jest, Chapter 22 because it is the second time the plant has gone through the process.

While the particulars of Homer City's financial troubles are unique, they reflect a challenging economic situation for coal generators around the United States.

Units 1 and 2 at the plant, with a combined capacity of 660 MW, began operation in 1969. Unit 3, at 692 MW, launched in 1977. Edison Mission Energy, the merchant generation arm of Edison International, bought the Homer City plant for $1.8 billion from subsidiaries of GPU and New York State Electric & Gas in 1999.

In 2002, Edison Mission completed a $1.6 billion sale-leaseback with General Electric Capital, but by 2012, the plant was not making enough money to cover its lease payments to GE, so it handed over control to GE Capital, and the company that held the plant’s debt, Homer City Funding, entered Chapter 11 bankruptcy.

Homer City Funding emerged as Homer City Generation, which was 90% owned by a group of seven owners that are ultimately owned by a subsidiary of GE Capital, a unit of General Electric, and 10% owned by Metropolitan Life.

The plant was struggling against lower cost gas-fired generation that was bumping it out of the wholesale market dispatch stack. In the first half of 2012, the plant had an average realized energy price of $31.53/MWh against average fuel costs of $32.61/MWh.

In this environment, GE Capital invested up to $750 million to install scrubbers on two of the plant’s three units in order to comply with the Environmental Protection Agency emissions rules, including the Mercury and Air Toxics Standards rule that took effect in 2015.

The operating economics for the plant did not improve, however, and in 2015 Homer City began to defer coal shipments from CONSOL Energy, its main coal supplier. Coal companies do not want to lose market share in a challenging market, so they often do not impose penalties provided for under contract. Eventually though, CONSOL ended up suing Homer City for breach of contract.

By last February, GE Cap had announced a $800 million after-tax write-down of its investment in Homer City and cut off its $75 million line working capital. Moody’s Investors Service downgraded Homer City Generation’s debt deeper into junk bond territory with a Caa2 rating and a negative outlook, citing “deteriorating wholesale energy market conditions” and an “unsustainable capital structure.”

Over the summer and fall, GE Capital tried to sell Homer City, but the bids came in at between $230 million and $535 million, well below company’s $606 million of debt.

Now Homer City Generation LP is emerging from Chapter 11 for the second time. The pre-packaged bankruptcy moved through the court quickly, entering in January and emerging in mid-February, in a debt-for-equity swap that saw the holders of about $600 million of Homer City debt become the new owners.

Market sources say that hedge funds Wellington Management, GoldenTree Asset Management, TCW, and Elliott Associates are among the new owners. Inquiries to those companies were not returned.

Uncertain future

Homer City Generation comes out of bankruptcy carrying less debt, but it still faces significant hurdles. The $600 million debt load has been converted to equity, and the company has secured $150 million in exit financing from Morgan Stanley Senior Funding.

Homer City also has about $20 million of cash on hand, but it is facing the same challenging market conditions, as well as some substantial capital expenditures.

In addition, between 2008 and 2012, under prior ownership, capex at the plant was deferred, affecting the condition of the facility, according to court documents.

The needed investments will help ensure the plant can stay within or exceed its historical forced outage rate and comply with Pennsylvania’s Reasonably Available Control Technology NOx limits, known as RACT2, by installing selective catalytic reduction equipment on two of the three boilers.

The boilers also have experienced increased stresses because the units are being used to follow load instead of being run in continuous baseload mode as many plants of 1960 or 1970 vintage were designed to do.

The five year plan filed with the court puts the capex needs of the plant between $86 million and $77 million in 2017, $94 million and $85 million in 2018, $101 million and $84 million in 2019, $84 million and $64 million in 2020, and $107 million and $72 million in 2021.

Estimates in court documents prepared by PA Consulting project EBITDA for Homer City at $44.5 million in 2017, $33.2 million in 2018, $36.7 million in 2019, $72.8 million in 2020, and $92.6 million in 2021.

Whether or not the plant can turn around and hand in that kind of performance remains to be seen. Market fundamentals in PJM and NYISO have not changed significantly. And, so far, it has been a mild winter. In addition, several new gas-fired plants are scheduled to enter service in the next three or four years.

One analyst said Homer City could manage to pay off its debt is there were another polar vortex like the one that hit the Northeast in January 2014. And, if there was another one beyond that, equity might get paid, he said.

Coal's woes persist

Homer City’s woes, while particular to its situation, are not unique. Moody’s Investors Service recently downgraded two other coal-fired merchant generators in PJM and in Ohio, FirstEnergy’s coal plants are under pressure.

Last summer, FirstEnergy said it planned to sell or close its 136 MW Bay Shore coal plant in Oregon, Ohio, and units 1-4, representing 720 MW, of its seven unit W.H. Sammis coal plant in Stratton, Ohio, by 2020.

This fall, PSEG said it plans to shut two coal plants later this year, its 632 MW Mercer station in Hamilton Township, N.J., and its 620 MW Hudson plant in Jersey City, N.J.

In January, Moody’s downgraded Chief Power Finance to B2 from B1, with a negative outlook. Chief Power, an affiliate of ArcLight Energy Partners Fund V, is the financial vehicle for ArcLight’s stakes in Exelon’s portions of two coal plants it divested in 2015, the 1,711 MW Keystone and the 1,711 MW Conemaugh plants in western Pennsylvania.

Like Homer City, Chief Power is also challenged by higher than expected operating costs and has been laying off some workers and stretching out its maintenance cycle from three years to four years.

Chief Power could be upgraded if performance improves in the first quarter or if PJM capacity prices improve in the May auction, but there is also the possibility of a further downgrade if financial results do not meet expectations, Chang wrote.

In December Chang downgradedLongview Power, the project company for a new 700 MW coal plant in Maidsville, W.V., to B3 from B2 with a negative outlook.

The Longview plant is modern and highly efficient, meaning that it is frequently dispatched, and it has a low cost and source of nearby coal from its Mepco affiliate. But a fatality at the mining operation led to a disruption of coal supplies from Mepco and resulted in a “liquidity situation.”

Longview is still facing negative cash flow but has managed to win “financial convenient relief” from its lenders and secure an additional $30 million in deeply subordinated unsecured debt.

But both of those “short-term measures” do little to address “the fundamental challenges facing Longview including low power prices and higher than expected costs associated with the mining sector,” Chang wrote.

And while the Trump administration is taking steps to roll back regulations restricting coal-fired generation, many coal fired plants have already invested in equipment to comply with existing laws and regulations, such as the Mercury and Air Toxics Standards. In other cases, state emission rules, such as those in Pennsylvania, are putting pressure on coal plants.

The real question is what, short of an outright subsidy, the Trump administration can do.

“It is uncertain what the administration will do to help coal plants,” said Chang. To date, she noted, “the new administration’s efforts have focused more on helping oil and gas pipelines, which could put more pressure on coal plants.”